Fidelity: Shifting up a gear in emerging markets

Despite uncertainties associated with the Middle East conflict and implications for energy prices and interest rates, Emerging market equities have made solid progress in the year to date. In this update, Chris Tennant, Co-Portfolio Manager of the Fidelity Emerging Markets Fund and Fidelity Emerging Markets Limited, explains some of the recent performance drivers and why the future remains bright for the asset class.

Key points

• Structural tailwinds and scope for valuation re-rating provide scope for further gains in emerging market equities.
• The AI theme remains a powerful driver, but compelling investment opportunities exist among industrials and miners too.
• Avoiding the losers is just as important as identifying the winners in this rapidly evolving asset class.

Earlier in the year, we were anticipating interest-rate cuts in key regions and believed policy easing could be beneficial for emerging market equities. Although rate cuts now appear unlikely in the near term, the asset class has performed well in the calendar year to date, benefiting from strong earnings upgrades.

While the improvements in earnings have translated into positive market performance, we have not seen much of a re-rating in valuations: on a price-to-earnings basis, valuations are little changed and remain at multi-decade lows relative to developed-market peers. This is important, as it means there is still plenty of scope for further gains if the discount narrows as we expect.

A supportive commodity super-cycle

Structural growth in demand for raw materials should also support sentiment towards mining stocks and the emerging market complex more broadly. The global energy transition is extremely resource-intensive, requiring vast quantities of copper and other mined commodities. Recognising the direction of travel, the fund has had meaningful exposure to this part of the market and has benefited from strong share-price performance among favoured names with operations in Latin America and Africa.

The fund has also benefited from investments in industrial names. This is a sector where we see compelling investment opportunities as exports of cars, buses, trucks, mining machinery and grid equipment have been extremely strong. Chinese firms are steadily eroding the market shares of competitors in other regions. Again, our local research teams are finding a wide range of exciting investment opportunities here, whose impressive operational performance is feeding directly through to fund performance.

Bright lights in Korea and Taiwan

Of course, the other major driver of markets this year has been explosive growth in demand for microchips and other components used in AI solutions and the development of data centres. This powerful theme has been particularly beneficial for returns in 2026. Mega-cap technology firms in Korea and Taiwan have taken the limelight, and the fund has benefitted from exposures here, but our analysts have also done a fantastic job of identifying outperformers slightly lower down the market cap spectrum in this exciting space. Taiwan’s Elite Material and China’s Advanced Micro-Fabrication Equipment are notable examples of holdings that have fared well and made notable positive contributions.

Winners and losers

While we remain extremely positive on the outlook for the asset class as a whole, there are reasons to be vigilant in some areas. While China’s exporters are performing well, for example, many domestic-focused businesses in the country are seeing tougher trading conditions owing to subdued consumer confidence and spending.

Similarly, some listed IT services companies in India face rising competition from nimble disruptors, as well as the risk of obsolescence as customers embrace lower-cost AI solutions.

Cautious positioning in these areas has been rewarded in relative performance terms, as investors have recognised the risks and as stocks in these areas have typically underperformed.

It’s a useful reminder that in investing, there will always be losers as well as winners. An unrelenting focus on both and a willingness to invest with conviction where the best opportunities are identified will remain critical as the asset class moves into its next phase of growth.

12 month rolling performance

Past performance is not a guide to the future.
Source: Fidelity International, 31 August 2026. Strategy returns for Fidelity Investment Funds IX - Emerging Markets Fund – W ACC Share class in GBP terms. Basis: bid-bid, with income reinvested in GBP terms, net of fees. Comparative Index: MSCI Emerging Markets Index (Net).

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